Topic: limitation of territorial jurisdiction; territorial vs. personal jurisdiction

Ponente: Paras, J.

Parties: Commission on Internal Revenue (petitioner) and Japan Airlines(JAL) (respondent)

Nature: Petition for review which seeking the reversal of the decision of the Court of Tax Appeals which set aside petitioner’s assessment of deficiency income tax inclusive of interest and surcharge as well as compromise penalty

Facts:

That Japan Airlines is a foreign corporation engaged in the business of international air carriage.

That from 1959 to 1963, JAL had not been granted a certificate of public convenience and necessity to operate

However, since mid-July 1957, JAL had maintained and office at the Filipinas Hotel, Roxas Boulevard, Manila

That there was no selling of tickets in this office but was maintained merely for the promotion of the company’s public relations and to hand out brochures, literature and other information playing up to the attractions of Japan as a tourist spot and the services enjoyed in JAL planes

That on July 17, 1957, JAL constituted PAL as its general sales agent in the Philippines

That PAL sold for and in behalf of JAL, plane tickets and reservations for cargo spaces which were used by passengers or customers on the facilities of JAL

That on June 2, 1972, JAL received deficiency income tax assessment notices and a demand letter from CIR for a total amount of P2,099,687.52 inclusive of 50% surcharge and interest for the years 1959 through 1963

That JAL protested the said assessment through the following actions

First Action/Initiatory Action

Filed by: JAL

Kind of action: request for cancellation of assessments

Court: CIR

Issue/s: that as a non-resident foreign corporation, it was taxable only on income from Philippines sources and that they had no income in the years covered by the assessments

Ruling: denied by the CIR

JAL elevated the case to CTA

Secondary Action: before the CIR denied their claim for refund

Filed by: JAL

Kind of action: appeal

Court: CTA

Issue/s: same issues with the ones raised to the CIR

Ruling: CTA reversed CIR’s decision and denied the CIR’s motion for reconsideration

Tertiary action

Filed by: CIR

Kind of action: petition for review CTA’s decision

Court: Supreme Court

Issue/s: 1. Whether or not proceeds from sales of JAL sold in the Philippines are taxable as income from sources within the Philippines

2. Whether or not Japan Airlines is a foreign corporation engaged in trade or business in the Philippines

Ruling: petition was granted; CTA’s decision was set aside; JAL was ordered to pay the assessments

Reasoning:

1. Yes, the proceeds of JAL are considered income from sources within the Philippines

2. Yes, JAL is a resident foreign corporation under Sec. 84 (g) of the National Internal Revenue Code of 1939. The definition of “resident foreign corporation” is provided in sec.20 of the 1977 tax code (refer below)

Laws/Jurisprudence/Further court rulings

1. What may be considered income from Philippine sources?

The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged handshere and payments for fares were also made here in Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippines (Sec. 29,(3) of the Tax Code)

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets for international transportation. However, that does not render it less an income from sources within the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all inclusiveenumeration, and that no other kind of income may be so considered.

2. Is JAL a resident foreign corporation doing business in the Philippines?

Under Section 20 of the 1977 Tax Code:"(h) the term `resident foreign corporation' applies to a foreign corporation engaged in trade orbusiness within the Philippines or having an office or place of business therein."(i) the term `non-resident foreign corporation' applies to a foreign corporation not engaged in tradeor business within the Philippines and not having any office or place of business therein. There is no specific criterion as to what constitutes `doing' or `engaging in' or `transacting' business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization.

In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary

character (Pacific Micronesian Line, Inc. vs. Del Rosario and Peligon, 96 Phil. 23, 30, citing Thompson on Corporations, Vol. 8, 3rd ed., pp. 844-847 and Fisher's Philippine Law of Stock Corporation, p. 415).

-end-

Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. 60714 March 6, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner

vs.

JAPAN AIR LINES, INC., and THE COURT OF TAX

APPEALS, Respondents.

The Solicitor General and Attys. F. R. Quiogue & F. T. Dumpit, for

respondents

 

PARAS, J.:

This petition for review seeks the reversal of the decision* of the Court of

Tax Appeals in CTA Case No. 2480 promulgated on January 15, 1982

which set aside petitioner's assessment of deficiency income tax inclusive

of interest and surcharge as well as compromise penalty for violation of

bookkeeping regulations charged against respondent.

The antecedental facts of the case are as follows:

Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for

brevity), is a foreign corporation engaged in the business of international air

carriage. From 1959 to 1963, JAL did not have planes that lifted or landed

passengers and cargo in the Philippines as it had not been granted then by

the Civil Aeronautics Board (CAB) a certificate of public convenience and

necessity to operate here. However, since mid-July, 1957, JAL had

maintained an officeat the Filipinas Hotel, Roxas Boulevard, Manila. Said

office did not sell tickets but was maintained merely for the promotion of the

company's public relations and to hand out brochures, literature and other

information playing up the attractions of Japan as a tourist spot and the

services enjoyed in JAL planes.

On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its

general sales agent in the Philippines. As an agent, PAL, among other

things, sold for and in behalf of JAL, plane tickets and reservations for

cargo spaces which were used by the passengers or customers on the

facilities of JAL.

On June 2, 1972, JAL received deficiency income tax assessment notices

and a demand letter from petitioner Commissioner of Internal Revenue

(hereinafter referred to as Commissioner for brevity), all dated February 28,

1972, for a total amount of P2,099,687.52 inclusive of 50% surcharge and

interest, for years 1959 through 1963, computed as follows:

1959 1960 1961

Net income per P472,025.16 P476,671.48 P734,812.77 

investigation

Tax due thereon 133,608.00 135,001.00 212,444.00

Add: 50% surch. 66,804.00 67,500.50 106,222.00

1/2% mo. int.

(3 yrs.) 24,049.44 24,300.18 38,239.92

Total due P224,461.44 P226,801.68 P356,905.92

=========== =========== ===========

 

1962 1963 S U M M AR Y

Net income per P1,065,641.63 P1,550,230.48 P224,461.44

investigation

Tax due thereon 311,692.00 457,069.00 226,801.68

Add:50% surch. 155,846.00 228,534.50 356,905.92

1/2% mo. int. 523,642.56

(3 yrs.)

56,104.56 82,272.42 767,875.92

Total due P 523,642.56 P 767,875.92 P2,099,687.52

============= ============ =============

Compromise Penalty P 1,500.00

On June 19, 1972, JAL protested said assessments alleging that as a non-

resident foreign corporation, it was taxable only on income from Philippine

sources as determined under Section 37 of the Tax Code, and there being

no such income during the period in question, it was not liable for the

deficiency income tax liabilities assessed (Rollo, pp. 53-55). The

Commissioner resolved otherwise and in a letter-decision dated December

21, 1972, denied JAL's request for cancellation of the assessment (Ibid., p.

29).

JAL therefore, elevated the case to the Court of Tax Appeals which, in turn,

reversed the decision (Ibid., pp. 51-76) and thereafter denied the motion for

reconsideration filed by the Commissioner (Ibid., p. 77). Hence, this

petition.

Petitioner raises two issues in this wise:

1. WHETHER OR NOT PROCEEDS FROM SALES OF JAPAN AIR LINES

TICKETS SOLD IN THE PHILIPPINES ARE TAXABLE AS INCOME

FROM SOURCES WITHIN THE PHILIPPINES.

2. WHETHER OR NOT JAPAN AIR LINES IS A FOREIGN

CORPORATION ENGAGED IN TRADE OR BUSINESS IN THE

PHILIPPINES.

The petition is impressed with merit.

The issues in the case at bar have already been laid to rest in no less than

three cases resolved by this Court. Anent the first issue, the landmark case

of Commissioner of Internal Revenue vs. British Overseas Airways

Corporation (G.R. No.L-65773-74, April 30, 1987, 149 SCRA 395) has

categorically ruled:

"The Tax Code defines `gross income' thus:

`Gross income' includes gains, profits, and income derived from

salaries, wages or compensation for personal service of

whatever kind and in whatever form paid, or from profession,

vocations, trades, business, commerce, sales, or dealings in

property, whether real or personal, growing out of the

ownership or use of or interest in such property; also from

interests, rents, dividends, securities, or the transaction of any

business carried on for gain or profit, or gains, profits and

income derived from any source whatever" (Sec.

29(3);Emphasis supplied)

"The definition is broad and comprehensive to include proceeds

from sales of transport documents. The words `income from

any source whatever' disclose a legislative policy to include all

income not expressly exempted within the class of taxable

income under our laws. Income means `cash received or its

equivalent'; it is the amount of money coming to a person within

a specific time x x x; it means something distinct from principal

or capital. For, while capital is a fund, income is a flow. As used

in our income tax law, `income' refers to the flow of wealth

(Madrigal and Paternol vs. Rafferty and Concepcion, 38 Phil.

414 [1918]).

"x x x x x x

"x x x x x x

"The source of an income is the property, activity or service that

produced the income. For the source of income to be

considered as coming from the Philippines, it is sufficient that

the income is derived from activity within the Philippines. In

BOAC's case, the sale of tickets in the Philippines is the activity

that produces the income. The tickets exchanged hands here

and payments for fares were also made here in Philippine

currency. The situs of the source of payments is the

Philippines. The flow of wealth proceeded from, and occurred

within, Philippine territory, enjoying the protection accorded by

the Philippine government. In consideration of such protection,

the flow of wealth should share the burden of supporting the

government.

"x x x x x x

"True, Section 37(a) of the Tax Code, which enumerates items

of gross income from sources within the Philippines, namely: (1)

interest, (2) dividends, (3) service, (4) rentals and royalties, (5)

sale of real property, and (6) sale of personal property, does not

mention income from the sale of tickets for international

transportation. However, that does not render it less an income

from sources within the Philippines.

Section 37, by its language does not intend the enumeration to be

exclusive. It merely directs that the types of income listed therein be treated

as income from sources within the Philippines. A cursory reading of the

section will show that it does not state that it is an all-inclusive enumeration,

and that no other kind of income may be so considered (British Traders

Insurance Co., Ltd. vs. Commissioner of Internal Revenue, 13 SCRA 719

[1965]).

"x x x x x x

"The absence of flight operations to and from the Philippines is

not determinative of the source of income or the situs of income

taxation. x x x The test of taxability is the `source'; and the

source of an income is that activity x x x which produced the

income (Howden & Co., Ltd. vs. Collector of Internal Revenue,

13 SCRA 601 [1965]). Unquestionably, the passage

documentations in these cases were sold in the Philippines and

the revenue therefrom was derived from a business activity

regularly pursued within the Philippines. x x x The word `source'

conveys one essential Idea, that of origin, and the origin of the

income herein is the Philippines (Manila Gas Corporation vs.

Collector of Internal Revenue, 62 Phil. 895 [1935])."

The above ruling was adopted en toto in the subsequent case of

Commissioner of Internal Revenue vs. Air India and the Court of Tax

Appeals (G.R. No. L-72443, January 29, 1988, 157 SCRA 648) holding that

the revenue derived from the sales of airplane tickets through its agent

Philippine Air Lines, Inc., here in the Philippines, must be considered

taxable income, and more recently, in the case of Commissioner of Internal

Revenue vs. American Airlines, Inc. and Court of Tax Appeals (G.R. No.

67938, December 19, 1989, 180 SCRA 274), it was likewise declared that

for the source of income to be considered as coming from the Philippines, it

is sufficient that the income is derived from activities within this country

regardless of the absence of flight operations within Philippine territory.

Verily, JAL is a resident foreign corporation under Section 84 (g) of the

National Internal Revenue Code of1939. Definition of what a resident

foreign corporation is was likewise reproduced under Section 20 of the

1977 Tax Code.

The BOAC Doctrine has expressed in unqualified terms:

"Under Section 20 of the 1977 Tax Code:

"(h) the term `resident foreign corporation' applies to a foreign

corporation engaged in trade or business within the Philippines

or having an office or place of business therein.

"(i) the term `non-resident foreign corporation' applies to a

foreign corporation not engaged in trade or business within the

Philippines and not having any office or place of business

therein."

"x x x. There is no specific criterion as to what constitutes

`doing' or `engaging in' or `transacting' business. Each case

must be judged in the light of its peculiar environmental

circumstances. The term implies continuity of commercial

dealings and arrangements, and contemplates, to that extent,

the performance of acts or works or the exercise of some of the

functions normally incident to, and in progressive prosecution of

commercial gain or for the purpose and object of the business

organization (The Mentholatum Co., Inc., et al. vs. Anacleto

Mangaliman, et al., 72 Phil. 524 (1941); Section 1, R.A. No.

5455). In order that a foreign corporation may be regarded as

doing business within a State, there must be continuity of

conduct and intention to establish a continuous business, such

as the appointment of a local agent, and not one of a temporary

character (Pacific Micronesian Line, Inc. vs. Del Rosario and

Peligon, 96 Phil. 23, 30, citing Thompson on Corporations, Vol.

8, 3rd ed., pp. 844-847 and Fisher's Philippine Law of Stock

Corporation, p. 415).

There being no dispute that JAL constituted PAL as local agent to sell its

airline tickets, there can be no conclusion other than that JAL is a resident

foreign corporation, doing business in the Philippines. Indeed, the sale of

tickets is the very lifeblood of the airline business, the generation of sales

being the paramount objective (Commissioner of Internal Revenue vs.

British Overseas Airways Corporation, supra). The case of CIR vs.

American Airlines, Inc. (supra) sums it up as follows:

"x x x, foreign airline companies which sold tickets in the

Philippines through their local agents, whether called liaison

offices, agencies or branches, were considered resident foreign

corporations engaged in trade or business in the country. Such

activities show continuity of commercial dealings or

arrangements and performance of acts or works or the exercise

of some functions normally incident to and in progressive

prosecution of commercial gain or for the purpose and object of

the business organization."

Under Section 24 of Commonwealth Act No. 466 otherwise known as the

"National Internal Revenue Code of 1939", the applicable law in the case at

bar, resident foreign corporations are taxed thirty percentum (30%) upon

the amount by which their total net income exceed one hundred thousand

pesos. JAL is liable to pay 30% of its total net income for the years 1959

through 1963 as contradistinguished from the computation arrived at by the

Commissioner as shown in the assessment. Apparently, the Commissioner

failed to specify the tax base on the total net income of JAL in figuring out

the total income due, i.e., whether 25% or 30% level.

Having established the tax liability of respondent JAL, the only thing left to

determine is the propriety of the 50% surcharge imposed by petitioner. It

appears that this must be answered in the negative. As held in the case of

CIR vs. Air India (supra):

"The 50% surcharge or fraud penalty provided in Section 72 of

the National Internal Revenue Code is imposed on a delinquent

taxpayer who willfully neglects to file the required tax return

within the period prescribed by the law, or who willfully files a

false or fraudulent tax return, x x x.

 

"x x x x x x

"On the other hand, the same Section provides that if the failure

to file the required tax return is not due to willful neglect, a

penalty of 25% is to be added to the amount of the tax due from

the taxpayer."

Nowhere in the records of the case can be found that JAL deliberately

failed to file its income tax returns for the years covered by the assessment.

There was not even an attempt by petitioner to prove the same or justify

the imposition of the 50% surcharge. All that petitioner did was to cite the

provision of law upon which the surcharge was based without explaining

why it was applicable to respondent's case. Such cannot be countenanced

for mere allegations are definitely not acceptable. The willful neglect to file

the required tax return or the fraudulent intent to evade the payment of

taxes, considering that the same is accompanied by legal consequences,

cannot be presumed (CIR vs. Air India, supra). The fraud contemplated by

law is actual and constructive. It must be intentional fraud, consisting of

deception willfully and deliberately done or resorted to in order to induce

another to give up some legal right. Negligence, whether slight or gross, is

not equivalent to the fraud with intent to evade the tax contemplated by the

law. It must amount to intentional wrongdoing with the sole object of

evading the tax (Aznar v. Court of Tax Appeals, G.R. No. L-20569, August

23, 1974, 58 SCRA 519). This was not proven to be so in the case of JAL

as it believed in good faith that it need not file the tax return for it had no

taxable income then. The element of fraud is lacking. At most, only

negligence may be imputed to JAL for not ascertaining the dispensability of

filing the tax returns. As such, JAL may be subjected only to the 25%

surcharge prescribed by the aforequoted law.

As to the 1/2% interest per month, the same finds basis in Section 51(d) of

the Tax Code then in force which states:

(d) Interest on deficiency. Interest upon the amount determined

as a deficiency shall be assessed at the same time as the

deficiency and shall be paid upon notice and demand from the

Commissioner of Internal Revenue; and shall be collected as a

part of the tax, at the rate of six per centum per annum from the

date prescribed for the payment of the tax x x x; PROVIDED,

That the maximum amount that may be collected as interest on

deficiency shall in no case exceed the amount corresponding to

a period of three years, the present provisions regarding

prescription to the contrary notwithstanding.

The 6% interest per annum is the same as 1/2% interest per month and

petitioner correctly computed such interest equivalent to three years which

is the maximum set by the law.

On the other hand, the compromise penalty amounting to P1,500.00 for

violation of bookkeeping regulations appears to be without support. The

particular provision in the said regulations allegedly violated was not even

specified. Furthermore, the term "compromise penalty" itself is not found

among the penal provisions of the Bookkeeping Regulations (Revenue

Regulations No. V-1, as amended, March 17, 1947, pp. 836-837, Revenue

Regulations Updated by Prof. Eustaquio Ordono, 1984). The compromise

penalty is therefore, improperly imposed.

In sum, the following schedule as recomputed illustrates the total tax

liability of the private respondent for the years 1959 through 1963 -

Net Income 30% of Net Income as Add 25% surcharge Add 6% interest per

Summary of Total Income Tax Due under under Sec. 72 NIRC annum for a

maximum Tax Due from the

Secs. 24(a) and (b) of 1939 of 3 years under Private Respondent

(2) NIRC of 1939 Sec. 51(d) NIRC of 

1939

1959 P 472,025.16 P 141,607.54 P 35,401.88 P 25,489.35 P 202,498.77

1960 476,671.48 143,001.44 35,750.36 25,740.25 204,492.05

1961 734,812.77 220,443.83 55,110.95 39,679.88 315,234.66

1962 1,065,641.63 319,692.48 79,923.12 399,615.60

1963 1,550,230.48 465,069.14 116,267.28 581,336.42

P1,703,177.40

Accordingly, private respondent is liable for unpaid taxes and charges in

the total amount of ONE MILLION SEVEN HUNDRED THREE

THOUSAND ONE HUNDRED SEVENTY SEVENAND FORTY

CENTAVOS (P1,703,177.40) The dismissal for lack of merit by this Court

of the appeal in JAL v. Commissioner of Internal Revenue (G.R. No. L-

30041) on February 3, 1969 is not res judicata to the present case. The

Tax Court ruled in that case that the mere sale of tickets, unaccompanied

by the physical act of carriage of transportation, does not render the

taxpayer therein subject to the common carrier's tax. The common carrier's

tax is an excise tax, being a tax on the activity of transporting, conveying or

removing passengers and cargo from one place to another. It purports to

tax the business of transportation. Being an excise tax, the same can be

levied by the State only when the acts, privileges or businesses are done or

performed within the jurisdiction of the Philippines (Commissioner of

Internal Revenue v. British Overseas Airways Corporation, supra).

The subject matter of the case underconsideration is income tax, a direct

tax on the income of persons and other entities "of whatever kind and in

whatever form derived from any source." Since the two cases treat of a

different subject matter, the decision in G.R. No. L-30041 cannot be res

judicata with respect to this case.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the decision

of the Court of Tax Appeals in CTA Case No. 2480 is SET ASIDE; and (c)

private respondent JAL is ordered to pay the amount of P1,703,177.40 as

deficiency taxes for the fiscal years 1959 to 1963 inclusive of interest

andsurcharges.

SO ORDERED.

Fernan,C.J., Narvasas, Melencio-Herrera, Gutierrez,Jr.,Cruz, Paras,

Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Aquino, Medialdea,

Regalado,and Davide,Jr.,JJ., concur.